Lower first-quarter earnings surprised analysts, who had been forecasting an advance. But the groups' shares continued higher, as investors bet that their merger, with most of its benefits intact, will go through.

"People are starting to anticipate that the merger will definitely be approved," said Morgan Stanley analyst Michael Sayers.

Defensive Positions

The stocks' defensive qualities also have helped their recent rally, analysts said.

Veba earlier said its first-quarter operating profit fell 5% to 604 million euros ($548.3 million), while Viag's pretax profit fell 24% to 200 million euros. Lower electricity prices hit both companies, but analysts had underestimated the extent of the damage.

The shares have performed well in recent weeks. Since the beginning of March, Veba and Viag shares have climbed 20% and 17% respectively, while the DAX has dropped 9%.

Lynn Reinhardt, of Merrill Lynch, said the move into defensive stocks after the recent shakeout among technology shares is a factor.

The companies also are entering the home stretch to have their merger approved. The European Union Commission is expected to approve the deal on June 19, with the most notable concession expected to be the companies' divestment of their combined 48.75% stake in Vereinigte Energiewerke AG. The deal will have retroactive effect to Jan. 1, with the merged group renamed E.On.

The merger will create a company with total sales of nearly 90 billion euros and the fourth-largest power company in Europe. The companies expect 800 million euros in synergy savings to result from the deal.

Stabilization Expected

An apparent stabilization in electricity prices also will steady earnings for the merged group. "In the first quarter of 2000, electricity prices in Germany should have just about reached their lows," Viag said. The company said it should come close to matching last year's operating profits for full-year 2000.

Veba agreed, but said its full-year operating profit is expected to exceed last year's 2.3 billion euros.

Analysts were cautious. Even if electricity profits stabilize, they'll stabilize at a low level, said Merrill's Mr. Reinhardt.